Exchange-traded funds, or ETFs, can be a great way for investors to get stock exposure without doing the work of researching and maintaining a portfolio of individual companies. And dividend stocks can make fantastic long-term investments, both for their total return potential and their tendency to hold up well during tough times.
Two of the most popular ETFs that focus on high-dividend stocks are the Vanguard High Dividend Yield ETF (VYM +1.40%) and the iShares Select Dividend ETF (DVY +1.09%). Let's compare the two, and determine which one is the better choice now.
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Similar objectives, but different methods
Obviously, both the Vanguard High Dividend Yield ETF and iShares Select Dividend ETF are dividend oriented. However, they have rather different portfolios.
The Vanguard High Dividend Yield ETF tracks the FTSE High Dividend Yield Index, which is composed of stocks with higher-than-average dividend yields, specifically excluding real estate investment trusts. As of Jan. 31, the fund owned 397 different stocks, and its top holdings were Microsoft, JPMorgan Chase, Johnson & Johnson, ExxonMobil, and Wells Fargo.
On the other hand, the iShares Select Dividend ETF tracks the Dow Jones U.S. Select Dividend Index, which consists of 100 stocks with strong five-year records of paying dividends. So, not only is it invested in a far smaller basket of stocks than the Vanguard fund, its criteria mean that it's a completely different basket. The iShares fund's top five holdings currently are Lockheed Martin, CME Group, Caterpillar, NextEra Energy, and McDonald's.
One key takeaway is that there isn't nearly as much overlap between them as you might expect, given that both track indices of dividend stocks. In fact, only one stock makes it into the top 10 holdings of both: Chevron.
Fees, yield, and other considerations
As far as achieving their objective of providing their investors with steady payouts, both funds are quite similar. The Vanguard High Dividend Yield ETF has a 2.78% yield as of this writing, while the iShares Select Dividend ETF yields a slightly higher 2.87%.
When it comes to fees, on the other hand, there are major differences. The Vanguard High Dividend Yield ETF has a gross expense ratio of just 0.08%. In other words, for every $10,000 you have in the fund, your fees will be just $8 per year. Meanwhile, the iShares Select Dividend ETF has a gross expense ratio of 0.39% -- more than five times as much. To be fair, it's not that the iShares fund is unreasonably expensive. Rather, Vanguard's fees are simply much lower than average.
Now, a higher-fee fund can be worth it, if the performance more than compensates for the added cost. Here's a side-by-side comparison of how these funds did, inclusive of fees, over a few different periods.
|
Time Period |
Vanguard High Dividend Yield ETF Annualized Total Return |
iShares Select Dividend ETF Annualized Total Return |
|---|---|---|
|
1-Year |
21.25% |
15.72% |
|
3-Year |
13.57% |
11.98% |
|
5-Year |
14.74% |
14.50% |
|
10-Year |
9.41% |
8.40% |
Data Source: TD Ameritrade. Returns as of 1/31/18.
So, not only is the Vanguard High Dividend Yield ETF cheaper, but it has outperformed the iShares Select Dividend ETF over all four of these time intervals.
Which is the better buy?
To be clear, I don't think investors can go wrong with either of these ETFs. Both are reasonably priced ways to get exposure to a variety of top-notch dividend stocks in your portfolio.
Having said that, the Vanguard High Dividend Yield ETF is the clear winner of this comparison. Not only are its fees significantly lower, but it has outperformed the iShares fund significantly and fairly consistently over the past decade. While past performance is not a guarantee of future results, it is certainly an important factor to consider. In addition, the Vanguard fund is less concentrated (roughly 400 stocks as opposed to just 100).
The bottom line is that the Vanguard High Dividend Yield ETF remains perhaps the best way for investors to get exposure to top-notch dividend stocks without putting in all the effort required to build their own diversified dividend stock portfolio.
